Goldman Sachs warns: The technical outlook for U.S. stocks remains optimistic, but the "risk train" is approaching head-on

Trade risk mitigation, the stability of the Federal Reserve Chairman's position, and a favorable technical outlook collectively supported the S&P 500 index, which set a historical high for four consecutive days last week. However, Goldman Sachs warned that there are hidden concerns behind the "perfect market."

Tony Pasquariello, head of Goldman Sachs' hedge fund business, recently stated that the U.S. stock market continued its strong performance last week, but short-term risks are accumulating, and the "risk-reward ratio" is not high. Pasquariello noted that whether the U.S. stock market can maintain its upward trend depends on three major tests this week: the earnings reports of tech giants, the FOMC meeting, and tariff negotiations.

Trade Implementation, Federal Reserve Stability, AI Gold Rush... Supporting New Highs in U.S. Stocks

Pasquariello summarized five prominent events in the market over the past week.

First, as the critical deadline of August 1 approaches, several framework agreements have been reached, including with Japan. Although the relevant terms exceed the 10% "pause" benchmark, they are indeed being implemented, which has greatly alleviated market concerns about trade risks and compressed market risk premiums.

Second, the controversy over the Federal Reserve's independence continues to ferment, with various speculative reports emerging. In the short term, the related disputes are unlikely to dissipate, but at least this week has passed, and Federal Reserve Chairman Jerome Powell remains firmly in his position.

Third, the earnings season is in full swing, and tech giants like Google have sent a strong signal, indicating that capital expenditures on AI infrastructure are only increasing, which remains the market's biggest highlight.

Fourth, the current market technicals still favor the bulls. However, Pasquariello also reminded investors to note that certain specific positions within the market are facing ongoing and significant pressure.

The Market is Too "Perfect," Caution is Needed for Potential Risks

Pasquariello pointed out that despite the continuous growth of the U.S. economy, a loose financial environment, and the ongoing market sentiment driven by AI concepts, several fundamental concerns are beginning to emerge.

For example, if Goldman Sachs' economic team is correct in their assessment of the second half of the year, the trade-off between growth and inflation may no longer be favorable, which would pose challenges to market valuations.

Additionally, retail investors are chasing high-risk assets, with penny stocks and high short-interest targets experiencing surges, leading to the accumulation of speculative bubbles. Furthermore, the pressure of rising long-term interest rates, although it has not yet had a substantial impact on the market, is still brewing.

Pasquariello noted that while the U.S. stock market remains in a bull market and the main trend is still upward, in the short term, the "risk-reward ratio" has begun to become less attractive.

Pasquariello also stated that if any factor could overwhelm the aforementioned risk variables, it would certainly be the delivery of impressive earnings reports by the world's largest and most innovative tech companies. Microsoft and Meta will announce their earnings reports this Wednesday, while Amazon and Apple will release theirs on Thursday, making these reports a key observation window It is worth noting that the market's attitude towards AI capital expenditure has changed. Unlike last year, the market is now once again positively welcoming commitments to AI investment, which will become a crucial observation dimension this week. However, an important question is whether the market will begin to distinguish between "quality investments" and "blindly burning money."

At the same time, the Federal Reserve FOMC meeting is convening (with the possibility of the first dissenting votes from two board members since 1993, indicating increasing internal divisions), and non-farm payroll data will be released. This week is a key moment for the market to "verify its true identity."

Hedge Funds Are Pulling Back, Retail Investors Are Full Throttle

Pasquariello stated that the latest fund flow data reveals a significant structural differentiation among investors in the U.S. stock market.

Although Goldman Sachs' active hedge fund clients have been reducing their positions in U.S. stocks for four consecutive weeks, overall positions remain below the levels seen in February, at the end of last year, and last summer.

Quantitative program traders continue to buy, recording $99 billion in purchases last month, with an expected $89 billion entering next month.

In stark contrast to professional investors, U.S. retail investors have been enthusiastic in recent months, sparking a wave of speculation. Several speculative signs are alarming, including a surge in the proportion of bullish options trading, a spike in trading volume of "penny stocks" priced below $1, and heavily shorted stocks being "squeezed," resulting in strong rebounds.

Pasquariello expects both professional investors and retail investors to continue supporting the stock market, but as July transitions into August, the intensity of this buying will show seasonal slowing. At that time, the "baton" of the market will be handed over to U.S. companies themselves, entering the stock buyback window after the earnings season, with August typically being the most active month for corporate buybacks.

Therefore, while Pasquariello has concerns about the sustainability of the current wave of highly speculative buying by retail investors, the overall trend of net inflows is still expected to continue for some time